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What is Grey Market?

The gray color affects the mind and body by causing unsettling feelings. Hence the gray (grey) market can be coined as an off the record market for the securities where trading eventually occurs when a stock that has been hanged down from trades off the market, or when new securities are asked and bided before official trading begins. The gray market enables the issuer and underwriters to estimate demand for a new offering because it is a “when issued” market (i.e., it trades securities that will be offered in the very near future). 

Characteristics of gray market:

  • This market in financial securities is considered as unofficial for over-the-counter (OTC) transactions.
  • Unlike classical OTC trading where securities don’t trade on an exchange, the gray market trades in financial products which have been hanged down from formal trading, or we can say those have not started an official trading.
  • The gray market can be coined to the products, generally imports which are sold through substitutional retail channels.
  • In any case, though not illegal, the informal status increases the riskiness of this market.

Unlike black market, in gray market binding trade, transactions cannot be settled until formal trading begins. This may lead a crafty party to reverse on the trade. Due to this uncertainty, a few institutional investors, like pension funds and mutual funds, may not participate in such kind of a trading.

The gray market for products flourishes when there is an important price disparity for a famous product in different countries. In various countries, there occurs a marked gray market for popular consumer goods as these can be purchased online and shipped to any location in an easy manner. Pharmaceuticals, Luxury cars, cigarettes, high-end apparel, cosmetics, handbags and shoes are such other examples. Informal dealers may import such items in bulk and, adding a healthy margin, they do sell them at a price below the local cost to increase market segment. 

Post-sale service and support is another vital issue, as authorized dealers may not service goods bought in the gray market. 

Consumers may also occasionally unintentionally buy a gray market product. Major possibility that a product is from a gray market are a price that is considerably lower than that offered by other local retailers.

Impact on Businesses

The size of gray markets is important. Business done other than official channels poses challenges for the manufacturers of the goods. Other than from the loss of sales booked directly by a company, it also produces a risk to brand equity and damages healthiness of the official sales channel ranging from wholesalers to retailers, whose forte for sought-after goods is curtailed.

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